Split in Temer ruling coalition likely dooms reform agenda

BRASILIA, Oct 26 (Reuters) - Brazilian President Michel Temer faces a split in his coalition that is likely to derail his plans to put Brazil’s financial house in order after a majority of Congressmen from his main ally party voted to put him on trial on graft allegations.

The lower house of Congress voted 251-233 on Wednesday to shelve the corruption case against Temer, ensuring his survival in office.

But the president’s reform agenda appears in tatters, with little chance of passing an effective overhaul of the costly social security pension system after most Brazilian Social Democratic Party (PSDB) lawmakers opted for him to go on trial.

In the biggest revolt yet against his 13-month-old government, 23 Congressmen for the PSDB voted to have him stand trial before the Supreme Court, with only 20 supporting the president.

With his coalition in disarray, Temer cannot muster sufficient votes to pass a pension reform that is the cornerstone of his efforts to plug a budget deficit that has scared off investors.

Temer celebrated his Wednesday victory by proclaiming that “the truth had won out” and said his government would return to its task of recovering Brazil from its worst ever recession.

His chief of staff Eliseu Padilha said pension reform talks would resume within days.

However, Temer did not even win a simple majority on Wednesday night in the 513-seat lower house.

That simple majority is needed to pass any new laws, and was far from the 308-vote super majority required for a constitutional amendment such as the pension reform bill.

“I don’t see it being approved, or even debated,” Fabio Sousa, a first-term PSDB lawmaker, said of the pension reform. “His government is fragile and there are general elections next year.”

LAME DUCK

Sousa believes there were grounds to put Temer on trial for graft and he wants to see his party break with the government and withdraw its four ministers from the cabinet.

Many in the PSDB, while backing economic reforms like those Temer has proposed, think they need to come from a more legitimate government. Temer’s popularity has sunk below that of impeached leftist Dilma Rousseff who he helped oust last year.

Brazil’s stocks, foreign currency and other financial markets reacted calmly to Wednesday’s vote, with ups and downs far below 1 percent, a sign that Temer’s survival by a narrow margin was well priced in.

He said that if even the smallest pension reform passes, it would be a big surprise and plus for investors.

Finance Minister Henrique Meirelles told journalists the government would insist with its current proposal of a minimum retirement age and stricter rules for pension benefits.

The pension bill would make Brazilians retire later in order to stave off a financial collapse of the social security system. Many lawmakers, including those who voted to spare Temer from a criminal trial, are reluctant to vote for an unpopular bill with elections approaching in 2018.

“It is clear that a broad pension reform will not be approved in Congress by the Temer administration. But some changes are possible,” political analysts at Brasilia-based consultancy Arko Advice wrote in a report this week. (Reporting by Anthony Boadle, Maria Carolina Marcelllo, Lisandra Paraguassú and Silvio Cascione; Editing by Andrew Hay)